Treasuries fell, lifting 10-year yields by the most in more than a week, as two Federal Reserve officials suggested the central bank may raise interest rates as soon as next month.
San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart said policy makers may raise rates as soon as their April 26-27 meeting. The gap between yields on 10-year notes and equivalent inflation-indexed securities, known as the break-even rate, rose to the highest since Aug. 11, according to data compiled by Bloomberg. It suggests inflation will average about 1.65 percent annually over the next decade, approaching the Fed’s 2 percent target.
“Williams put the Fed back in play quicker than the market was ready for, with comments that we’re on a path to higher rates — maybe in April or June,” said Mike Franzese, the New York-based head of fixed income at MCAP llc, a broker-dealer. “He sees the necessity to start getting the market ready for a rate hike regardless of what’s going on in the global economy.”
Fed officials last week left interest rates unchanged and pared their forecasts for 2016 increases to two from four, citing risks posed by weaker global growth and financial-market turmoil even as U.S. economic data improve. Traders have recalibrated bets on inflation after data last week showed core consumer-price gains exceeded analyst estimates. Crude-oil prices have gained for each of the past five weeks after plunging to a 12-year low in February.
Benchmark U.S. 10-year yields rose four basis points, or 0.04 percentage point, to 1.92 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in February 2026 fell 3/8, or $3.75 per $1,000 face amount, to 97 12/32.
Williams told Market News International in an interview that if economic data continue to improve, “April or June would definitely be potential times to have an increase in interest rates.” Lockhart said Monday in Savannah, Georgia that recent economic data “justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April.”
Futures prices indicate a 10 percent chance that the Fed will raise rates by April and a 42 percent probability of an increase by June, according to data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.
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The yield on the 30-year bond, the maturity most sensitive to inflation expectations, rose for the first time in six days after posting its biggest weekly decline since January.
“The concern to me is inflation expectations,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “We’re are at a six-month high. Part of that is the rebound in oil.”
Richmond Fed President Jeffrey Lacker said the pace of price gains will accelerate as oil stabilizes.
“I am reasonably confident that, barring subsequent shocks, inflation will move back to the FOMC’s 2 percent objective over the medium term,” Lacker said in remarks prepared for a speech at the Banque de France in Paris Monday, referring to the policy-setting Federal Open Market Committee.
The Fed’s preferred gauge of inflation, which is the Commerce Department’s personal consumption expenditures measure, hasn’t matched the central bank’s 2 percent goal since April 2012.
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